Securities Law & Instruments

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Application for relief from prospectus requirement in section 53 of the Act regarding distributions of securities of the issuer to shareholders (who are also key employees) of licenced automotive dealers operating in the applicable jurisdictions (or their holding companies) – Filer distributes securities in order to allow for payment of commissions for dealers to sell warranty programs offered by the filer – Relief granted subject to conditions, including that subsequent trades restricted to specified transferees.

 

Applicable Legislative Provisions

 

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).

National Instrument 45-106 Prospectus Exemptions.

 

July 27, 2018

 

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

ROYAL NATIONAL INSURANCE COMPANY LTD.

(the Filer)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the prospectus requirement (the Exemption Sought) in connection with the issuance from time to time of shares of the Filer to Dealer Principals (as defined below), associates of a Dealer Principal and successors to a Dealer Principal’s business.

 

For purposes of this decision, the term “associate” where used to indicate a relationship with a Dealer Principal (as defined below) shall mean:

 

(i)            any person who resides in the same home as the Dealer Principal and to whom the Dealer Principal is married or with whom the Dealer Principal is living in a conjugal relationship outside marriage;

 

(ii)           any child of the Dealer Principal;

 

(iii)           any trust or estate in which the Dealer Principal has a substantial beneficial interest or as to which the Dealer Principal serves as trustee or in a similar capacity; or

 

(iv)          any company of which the Dealer Principal beneficially owns, either individually or together with a person mentioned in paragraph (i) or (ii) and either directly or indirectly, 100% of the voting rights attached to all voting securities of the company for the time being outstanding.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

(a)           the Ontario Securities Commission is the principal regulator for this application; and

 

(b)           the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador, the Yukon Territory, the Northwest Territories and Nunavut.

 

Interpretation

 

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

 

Representations

 

This decision is based on the following facts represented by the Filer:

 

1.             The Filer is a registered insurance company incorporated on December 9, 1988 and existing under the laws of Barbados in accordance with the provisions of the Exempt Insurance Act, 1983. It is in the business of reinsuring obligations under creditor life insurance contracts, creditor accident and sickness insurance contracts and various other insurance coverages arising out of the sale or lease of automobiles by commercially licensed automotive dealers operating in the provinces and territories of Canada (Dealers).

 

2.             The Filer is not, and has no intention to become, a reporting issuer in any province or territory of Canada and is not an “investment fund” as defined in the Legislation. Except as noted in paragraphs 17 to 22 below, the Filer is not in default of the securities legislation of any province or territory of Canada.

 

3.             The Filer was originally formed by American Bankers Life Assurance Company of Florida (ABLAC) to establish an insurance company to reinsure the insurance written through Dealers in order to enable the shareholders (who are also key employees) of such Dealers (the Dealer Principals) to participate in the profits of the insurance generated by them.

 

4.             The Filer has entered into a reinsurance treaty and management contract with ABLAC and American Bankers Insurance Company of Florida (collectively, American Bankers) to permit the Filer to realize substantially all of the profits on business generated through the Dealers while minimizing the losses which may be realized on such business.

 

5.             The Dealers forward applications for insurance contracts received from purchasers or lessees of motor vehicles to American Bankers and certificates of insurance coverage are issued by American Bankers to the customers of the Dealers who purchase such insurance, and American Bankers reinsure the business written through the Dealers with the Filer.

 

6.             Effective May 31, 2018, American Bankers was replaced by The Canada Life Assurance Company (Canada Life) such that the Dealers sell insurance coverage issued by Canada Life to its customers, and the business written through the Dealers will be reinsured by (i) Canada Life entering into a reinsurance treaty with International Insurance & Guarantee SCC (IIG) and (ii) IIG entering into a retrocessional reinsurance treaty with the Filer. However, there is no management contract between the Filer and Canada Life.

 

7.             The authorized capital of the Filer consists of 100,000 common shares without nominal or par value, divided into 1,000 classes, each of 100 shares (the RNIC Shares).

 

8.             The Filer issues RNIC Shares to Dealer Principals of Dealers, either directly or through a holding company that may be owned solely by the Dealer Principal or by the Dealer Principal and his or her associates, that have agreed to sell insurance products offered by the Filer so as to allow the Dealer Principals to participate in the profits of the insurance generated by their respective Dealers. Each Dealer Principal acquires 100 RNIC Shares of a separate class for an aggregate subscription price of $2,500.

 

9.             It is a mandatory requirement for Dealer Principals of Dealers that sell insurance products offered by the Filer, to subscribe for the RNIC Shares, either directly or through a holding company, as a Dealer Principal needs to hold a class of RNIC Shares in order to receive the profits generated by his or her Dealer from its insurance sales via dividends from its shareholder account, as further described below.

 

10.          Dividends on the RNIC Shares are declared and payable only from the shareholder account attributable to the specific class of shares held by the Dealer Principal or his or her holding company and not out of any capital or surplus or shareholder account attributable to any other class of shares. Dividends on the RNIC Shares are payable when and as declared by the board of directors of the Filer.

 

11.          The shareholder account from which dividends are paid for each class of RNIC Shares includes (i) the paid-in capital attributable to the RNIC Shares, (ii) the Dealer’s pro rata share of the Filer’s profits or losses from all insurance sales, (iii) the Dealer’s investment income or loss, less (iv) any allocation of common operating expenses, and (v) the dividends paid or share redemptions in respect of the RNIC Shares.

 

12.          The RNIC Shares have not been, and will not be, sold to any person other than Dealer Principals or their associates.

 

13.          The by-laws of the Filer provide that only Dealer Principals or their associates are allowed to purchase the RNIC Shares and that the respective Dealer Principals control the voting of such RNIC Shares.

 

14.          There is no market for the RNIC Shares and the constating documents of the Filer provide for restrictions on their transfer. Pursuant to the by-laws of the Filer, the RNIC Shares shall not be transferred without the approval of the board of directors of the Filer.

 

15.          The by-laws of the Filer also provide that the Filer may repurchase the RNIC Shares.

 

16.          As of the date hereof, the Filer has 370 shareholders, all resident in the Province of Ontario, holding an aggregate of 37,000 RNIC Shares. The Filer would like to engage Dealers in other provinces and territories of Canada to offer its insurance products and therefore offer the RNIC Shares to Dealer Principals, either directly or through a holding company that may be owned solely by the Dealer Principal or by the Dealer Principal and his or her associates, in such other provinces and territories.

 

17.          The Filer previously obtained a ruling from the OSC, dated August 20, 1990 and varied on November 30, 1990, granting the Filer an exemption from the prospectus and registration requirements in connection with the issuance of RNIC Shares to Dealer Principals, their associates and successors to their business in Ontario (the Previous Decision).

 

18.          The representations in the Previous Decision contemplated the issuance of RNIC Shares over a two to ten year period. The Filer has been made aware that the Previous Decision could be read to be limited to this ten year period and as a result seeks the Exemption Sought. The Filer believes that all purchasers of the RNIC Shares to date have been accredited investors.

 

19.          The Filer acknowledges that, if the Previous Decision were interpreted to be limited to a ten year period, to the extent that distributions of securities were made to any purchasers of RNIC Shares without an available exemption subsequent to August 20, 2000, such distributions were made in contravention of the prospectus requirement of the Legislation.

 

20.          The Filer further acknowledges that the management team of its previous management company did not maintain and enforce the necessary procedures to ensure complete compliance with the Previous Decision, and that the Filer did not send annually an information circular in accordance with the Legislation as required by the Previous Decision.

 

21.          In late 2017, the compliance and legal department of a service provider to the Filer (the Service Provider) identified that the issuance of the RNIC Shares since August 30, 2000 might not be in conformity with applicable securities laws and forthwith retained new external counsel, which counsel was not involved with the application for nor compliance with the Previous Decision, to bring an application in order to seek the Exemption Sought. In February 2018, the Filer changed its management company to a wholly owned subsidiary of the Service Provider (the Current Management Company), and the Current Management Company has retained personnel and taken appropriate steps to put in place policies and procedures that establish a system of controls and supervision sufficient to provide reasonable assurance that it will comply with applicable law.

 

22.          The Filer acknowledges that the Exemption Sought does not apply retroactively to the non-compliance noted in paragraphs 19 and 20.

 

23.          The Filer has considered whether, under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the Legislation, it could be considered to be engaged in or holding itself out as engaging in the business of trading in securities and therefore required to register as a dealer, rely on another exemption from the dealer registration requirement or seek exemptive relief from the dealer registration requirement. In light of the particular facts and circumstances of the Filer, including the fact that it has no offices or employees, does not receive any fees or other income from engaging in trades or acts in furtherance of distributions, and its activities do not have the attributes typical of a person or company carrying on the business of a dealer, and having considered the guidance in section 1.3 of the Companion Policy to NI 31-103, the Filer has concluded that it should not be considered to be engaged in registrable activities and therefore does not require relief from the registration requirement of the Legislation.

 

24.          The Current Management Company has established, and maintains and applies, policies and procedures that establish a system of controls and supervision sufficient to provide reasonable assurance that the Filer and each individual acting on its behalf complies with the Legislation, including compliance with the terms and conditions of any statutory or discretionary exemption under the Legislation.

 

Decision

 

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

 

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

 

(a)           prior to the issuance of RNIC Shares to a prospective shareholder, the Filer shall deliver to such prospective shareholder a copy of:

 

(1)           the articles and by-laws of the Filer, and all amendments thereto;

 

(2)           the most recent annual audited financial statements of the Filer;

 

(3)           this decision; and

 

(4)           a statement to the effect that, as a consequence of this decision, certain protections, rights and remedies provided by the Legislation, including statutory rights of rescission or damages, will not be available to the shareholder and that certain restrictions are imposed on the subsequent disposition of the RNIC Shares; and

 

(5)           an information document pertaining to the Filer and describing, among other things, the method by which revenues, expenses and losses will be calculated for purposes of the dividends payable to each shareholder’s capital accounts;

 

(b)           all certificates representing RNIC Shares shall bear a legend describing the restrictions on the transfer of the RNIC Shares;

 

(c)           the exemptions contained in this decision shall cease to be effective if any of the provisions of the articles or by-laws of the Filer relevant to the exemptions granted herein are amended in any material respect without written notice to, and consent of, the principal regulator;

 

(d)           the Filer prepares and sends to each of its shareholders, on an annual basis, audited financial statements and such notices and information as are required under Barbados law in respect of the annual meetings of shareholders;

 

(e)           the Filer conducts annual meetings in accordance with applicable Barbados corporate law;

 

(f)            the Filer prepares and sends to each of its shareholders a statement of account, on at least an annual basis, that includes dividends paid to the shareholder, which is mailed to the shareholder and available to the shareholder through an online portal;

 

(g)           the first trade of any RNIC Share by a Dealer Principal, his or her associate or a successor to his or her business to a person or company other than the Filer or another Dealer Principal, his or her associate or a successor to his or her business, shall be deemed a distribution; and

 

(h)           this decision shall cease to be effective after the date that is five years after the date of this decision, unless the Filer applies for and is granted exemptive relief that is substantially the same as the Exemption Sought with respect to the then issuance of RNIC Shares.

“Philip Anisman”

Commissioner

Ontario Securities Commission

 

“Deborah Leckman”

Commissioner

Ontario Securities Commission